Coronavirus to put a dent in Chinese insurers’ earnings – S&P

The novel coronavirus outbreak will likely be detrimental to Chinese insurers’ earnings and revenues in 2020, according to a report by S&P Global Ratings.

The global ratings agency expects potential equity market volatility and persistent reinvestment challenges to strain domestic insurers’ bottom lines. This is due to a slowdown in business activities, leading to a decrease in face-to-face engagements with customers.

“We anticipate that the capital buffers for our rated insurers, though narrowed, will remain sufficient at existing rating levels,” said WenWen Chen, credit analyst at S&P Global Ratings. “Meanwhile, the pressure on capital could be more pronounced on smaller insurers without strong parent group support in China’s large insurance market, which is dominated by key domestic insurers.”

According to S&P, life insurers’ efforts in growing their traditional tied agency distribution channels may grind to a halt, due to concerns over human-to-human transmission of the virus. The reduction in meeting agents face-to-face could affect the sales of protection-type policies.

“Particularly, we anticipate that new business activity will contract during the first half of 2020. Hubei, the province most affected by the coronavirus, serves as one of the top 10 markets in China, accounting for approximately 4.3% of the sector’s gross premiums written in 2019,” it said.

While the amount of claim expenses associated with the outbreak has yet to be determined, medical costs for future treatments may burden insurers. As of February 03, the Ministry of Finance and local governments have planned to allocate total funding of RMB 47 billion (US$6.7 billion) to assume responsibility of medical-related costs. S&P estimates mortality claims to be moderate given the seemingly low fatality rate of the coronavirus infection.

On the positive side, the outbreak could increase insurance awareness in China, and may help the longer-term development of the country’s life insurance sector, the report said. As the world’s second-largest life insurance market, China’s growth potential remains strong.

Meanwhile, for the P&C insurance segment, the coronavirus outbreak is also expected to be detrimental, as insurance companies encounter decreasing profitability.

According to the report, a lower economic outlook and increasing claims may pinch the already shallow pockets of Chinese P&C insurers. Intense competition and ongoing motor pricing reforms have decreased profitability for the segment. Furthermore, a slowing economy may lead to higher delinquencies for credit guarantee insurance contracts.

The outbreak can also lead to lowered auto sales, especially in the earlier months of 2020, which will have a knock-on effect on motor insurance.

Meanwhile, the increasing awareness of protection arising from the coronavirus outbreak can lead to increased demand for accident and health insurance. However, S&P expects profitability of the non-motor insurance sector to remain subdued if the same pricing philosophy remains unchanged.

Furthermore, demand for insurance against business interruption, event cancellation, and liability-related risks may increase, as businesses seek protection from various man-made and natural calamities. S&P cited limited underwriting expertise and technical pricing among Chinese insurers as the main obstacles the market faces.